"The risk associated with the high leverage is very high,"
he says, insisting AAFX encourages its customers to limit the
leverage they use, suggesting around 500x as a manageable
level, despite allowing them to take four times as much.

"However we believe that the forex market is different."

Atif is concerned attempts to limit leverage could undermine
the investment case for FX generally among a significant
section of retail traders – at least among those he
sees trading on his platform.

"If you cap the leverage, it will hurt the FX Industry very
badly," says Atif. "The main attraction of the FX industry is
the leverage."

The implication is that a limit on leverage would drive
retail traders away and might end up driving down
liquidity.

Atif also frames the attack on leverage as an attack on
returns, a move that will ultimately hurt the public it is
supposed to protect by leaving them out of pocket –
not in the occasional market blow-up but in their everyday
trading.

"It would be less profit with low risk," he says.

Ultimately, in a free market there will always be suppliers
willing to meet demand, and there is certainly demand for
leverage.

"The majority of our clients want high leverage like 1:1000
or 1:2000," says Atif.

While there are traders looking for those kinds of returns,
and willing to ignore the risks associated with them, it is
naïve to expect brokers to shun that demand, without
regulatory redress.

If there was a level playing field, it might be easier for
the community to accept a cap of leverage around the 50:1 level
adopted by the US, as they wouldn't be inviting their clients
to move to their competitors.

The
Commodity Futures Trading Commission is considering tighter
regulations on how FX brokers handle transactions that
originate overseas, where retail leverage limits are less
onerous than the US.

Given the complex cross-border nature of FX
flows, from the perspective of the end-user, broker and
clearer, some, albeit self-interested, brokers argue US efforts
to impose rules on retail foreign-currency dealers be workable
in practice and a leverage cap, in general, is unlikely to
reduce systemic risks.

"We don't believe that 50:1 would make FX traders safer,"
says Atif.

He lays the blame for the blow-ups, like the one
triggered by the SNB, elsewhere, saying: "We need to
understand that the investor doesn't lose money because of the
leverage, but because of the manipulation in the market. We
need to stop that, or at least minimize it."

Ken Veksler of Accumen Management, a
boutique asset management and FX consultancy, says: "Any
perception that limiting the size of available leverage to
retail investors and speculators is going to have a direct and
adverse effect on overall market liquidity is laughable.

"Ultimately if anything, such leverage
limitations are likely to shore up and reduce counterparty
risk, which in of itself is the greatest current risk to
liquidity in FX."

He adds: "Banks and prime brokers are
going to be far more inclined to conduct business with brokers
[retail and otherwise] if they believe that the flow
they’ll be seeing isn’t 'toxic', such
as it may be presently perceived to be from those brokers or
institutions offering irrationally high/excessive
leverage."

Unless there is a global deal on leverage that is enforced,
brokers will continue to set up shop in the most permissive
jurisdictions to offer clients the chance to make a quick
buck.

Veksler concludes: "FX should never be made to be boring.
However, it should be made to be more selectively available to
professional and qualified counterparts and
participants.

"If you’re seeking the excitement of a casino,
then perhaps a casino is exactly where you should find
yourself, rather than the FX market."

Add Your Comment

All fields are compulsory

All comments are subject to editorial review as we are subject to the same regulations adhered to in publishing our own content. For this reason, your comment may not be live immediately, or may not be published.

Magazine

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies Policy before using this site.